If I have $10 million, how much should I give away while I’m alive?

Financial Planners

By Beth Pinsker

Potential changes to the estate tax mean that if you have a large estate, it’s essential to start planning now

Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at beth.pinsker@marketwatch.com.

Dear Fix My Portfolio,

Since the current estate-tax exemption is set to lower in 2026, you previously quoted an adviser who suggested that people with around $10 million might want to give money away while they were living to reduce the size of their estate to below what the new limits would be.

I’m not sure this makes sense, because the current exemption is use it or lose it. Wouldn’t that result in your remaining exemption being lowered too much? I don’t think there’s a clawback for gifts that exceed the reduced limit, but you don’t get to keep the extra amount. Wouldn’t you have to give away the full current amount of $12.9 million to take full advantage of today’s higher exemption? You couldn’t save it for the future by giving away part of it.



Dear D.S.,

The closer we get to 2025, the more complicated estate planning gets for people who have an amount between where the limits are now and where the limits might be in 2026.

Thanks to inflation, the current estate-tax exemption amount — which is the amount you have when you die without owing federal estate tax — jumped to $12.9 million for individuals, up from $12.06 million in 2022. It will increase to $25.84 million for couples, up from $24.12 million. But those rates sunset at the end of 2025. Without congressional action, the exemptions will revert to the levels that were in place before they were increased by the 2018 Tax Cuts and Jobs Act, putting them at half the amount of whatever the exemption has grown to by then as a result of inflation.

Very few families have faced federal estate taxes in the last few years: The IRS logged only 1,275 taxable-estate returns in 2020. But more families would have to consider the impact of estate taxes if the exemption amount went back down to something like $6.5 million per individual — even with new, favorable IRS portability rules allowing spouses to pass along their part of the exemption. In addition, 17 states and the District of Columbia have their own estate-tax and inheritance thresholds. A number like $6.5 million sounds big, but these days, that’s really just a healthy 401(k) and a nice house in a big city.

The first question to deal with here is whether the estate-tax exemption is actually going to revert. At the end of the day, this could be a lot of speculation for nothing. “Most people believe that Congress will pass another law that keeps [the higher limit] on the books, but there’s debate in this area,” says Eric Bronnenkant, head of tax at Betterment.com.

Given the U.S. political landscape, anything is possible — but because of partisan gridlock, most things are in fact impossible. The estate-tax area is especially fraught because it involves complex budget discussions and, potentially, a lot of tax revenue on large estates.

Although you could take a wait-and-see approach, the closer we get to the end of 2025, the busier estate lawyers and financial planners are going to get. If you have something like $10 million and you decide that giving away $3.5 is the best tax scenario for your estate, you probably aren’t going to just write a check. You’ll be looking for trust structures and other advanced estate-planning techniques that involve lawyers and accountants. Those things take time, and there’s no way to push them up to a deadline on Dec. 31, 2025.

We may even face a scenario in which Congress doesn’t act until sometime in 2026 and then makes changes retroactive to the beginning of that year. A legislative body can do that, but you can’t do the same with your own financial affairs.

One reason you’d want to give money away while you’re alive is to lower the size your estate will be when you die, which would minimize taxes. (There’s also joy to consider) If you have assets that are above the exemption limit set by the IRS, the federal tax will likely be 40% on the amount that’s over that limit.

There are a couple of ways to give away a significant amount of money to lower the value of your estate. The reason people hesitate is because most of those options are irrevocable — meaning you can’t change your mind later on.

“There’s some uncertainty about that ‘later on,'” Bronnenkant notes.

So, D.S., one of the issues you bring up is that you use up your exemption by giving away money. Say you have $10 million like the example above and you pass away after the exemption goes down. You’d owe federal estate tax on the $3.5 million difference. If you had given away that $3.5 million before the end of 2025, you’d have $3 million exemption remaining and you could have made a wise tax move — at least as long as you stayed under the new threshold. . If you gave away more than $6.5 million between 2018 and 2025 — up to the limit during that time — the IRS says you won’t be penalized.

But if the exemption ends up staying the same after 2026, at nearly $13 million, if you gave away $3.5 million, you’d have essentially $9.5 million left in lifetime exemption.

“Be careful not to use up your whole exemption. If you give everything away while you’re living, you won’t have any exemption left,” says Eric J. Einhart, an officer on the board of directors of the National Academy of Elder Law Attorneys who practices in New York.

The annual gift-giving limit without losing any of your lifetime exemption is $17,000 per recipient in 2023, up from $16,000 in 2022. You can craft a long-term strategy of gift giving to reduce your estate over time, but you’re going to have to amp it up by a lot to unload an amount like $3.5 million.

So what’s the best thing to do? It will not be the same for everyone. “There’s no one size fits all, but there are definitely strategies to employ if it makes sense,” Einhart says. And for that, you’ll need an estate planner who can look at your specific situation and see what works for you.

More Fix My Portfolio

-Beth Pinsker

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08-02-23 1219ET

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